Edward Life Sciences, Corp. (EW) appeared on our list of compressed stocks this morning. EW is a medical equipment manufacturer. The company made a surprise announcement yesterday that it is selling its critical care unit to Becton Dickinson (BD) for $4.2 billion. The deal represents less than 8% of EW’s enterprise value.
As you can see in the charts below, EW tends to make big moves following a compression signal. EW also tends to make big moves around earnings and other medical product announcements. By going out to the August 16th options expiration, we can take advantage of the compression signal, the earnings play, and any other unknown announcements that may come before the options expire.
This MDM graph compares the modeled expectations of current options prices (the orange line) to the actual movement of EW’s stock price over the past two years. You can see that the actual behavior (the blue histogram) made big moves up and down far more frequently than the modeled options prices expect. This tells us that EW options are relatively inexpensive.
This Volatility Cone graph is showing us that volatility expectations (the yellow dots) are all below the average historical volatility over the last two years. To learn more about the Volatility Cone, click here. This graph confirms that EW options are relatively inexpensive.
EW has a history of making big moves shortly after a compression signal. The company also tends to make big moves after earnings and product announcements. We love to buy straddles on companies in this industry group because they frequently have catalysts for big moves up or down that surprise investors.
Be sure to read the ODDS Online Daily Trade Idea report to get the details of our trade ideas for EW options today.
To access Odds Online Daily and be able to see any stock you are tracking in this software, click here.
Thank you,
Don Fishback
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